Manic Market Day 2

By: Kent Engelke | Capitol Securities

Equity markets ended considerably lower, the inverse of the previous day. The tech heavy NASADQ was down about 3% while the Dow was off about 1.5%. The decline in technologies was led by Facebook whose shares according to Bloomberg have dropped about $145 billion or 20% in value since its early February apex.

In an attempt to place Facebook’s capitalization into proper context, the $145 billion decline is greater than all but 28 members of the S & P 500. Facebook is still worth about $450 billion. Twelve years ago, Facebook turned down a $1 billion offer to be acquired by Yahoo.

Many times I have commented about the lopsidedness of the markets. Five companies representing about 1% off all shares outstanding represent about 14% of the S & P 500. Depending upon the source/proxy, technology represents a record 25% to 27% of the S & P 500.

For what it is worth department, there is only one S & P 500 ETF that does not have any technology represented in its portfolio; a statement in itself is misleading for this ETF owns Amazon which it considers a retailer.

On the other hand, oil represents the lowest weighting in the S & P 500 in at least 50 years according to Goldman. The historical average is about 10%. Today oil is less than 5% of the S & P 500 as per Goldman.

What I find confounding is that oil equities are priced for $25/barrel crude even as crude is hovering around 3-year highs of almost $66/barrel, up about 165% from February 2016 lows. Geopolitics, a historical driver of oil prices is a disaster, a disaster that is not reflected in prices. Wow!

Moreover, according to the Texas based law firm of Haynes and Boone, since 2014 over 350 public and private oil companies have filed for bankruptcy. Goldman writes the companies remaining are in a “sweet spot, with rising prices, low operating costs and considerably less competition.”

I can go on some rhetorical and conjectural rant as to why oil shares are underperforming, but will instead write the infallibility of the technology and momentum stocks was perhaps shattered last week by Facebook. As noted earlier in the week, many of these momentum technology companies were given a pass enabling behavior that would have sunk mere mortal companies.

If economics still is of any merit, economics dictates monies ultimately gravitate from sectors that are viewed as overvalued to those that are undervalued whose environment is improving not deteriorating.

What will happen today?

Last night the foreign markets were down. London was down 0.62%, Paris was down 1.11% and Frankfurt was down 1.19%. China was down 1.50%, Japan was down 1.34% and Hang Sang was down 2.50%.

The Dow should open moderately lower as the tech selloff continues. The market is reassessing the profit potential and valuation of this sector, the sector that has propelled the indices higher the last several years. I can envision a scenario where the averages are flat to down, but the rest of the market advances as the proverbial distribution phase occurs. The 10-year is up 4/32 to yield 2.76%.

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